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Maker DAO
Basics * Simple known as Maker. * Built on the Ethereum blockchain and introduced in January 2018. * Network Layer, one of the building blocks on top of the Ethereum blockchain. * Maker is comprised of a stablecoin, collateral loans, and decentralized governance. * ELI5 can be found here and a deeper break down of the vision here * Besides a whitepaper, also has a purple paper on why they have a reference implementation using the Haskell language. * From this article (30-1-2020): "Dai uses a governance mechanism to maintain its peg to the US Dollar. This mechanism would allow participants to vote on increasing or decreasing the supply of Dai; increasing supply if the price drifted too far upwards or decreasing it if the price slipped down from the peg. Simple supply-side economics predicts that an increase in an asset’s supply would reduce its price, while a decrease in supply would increase it. This mechanism has proven extremely versatile, allowing Dai to closely maintain its peg despite the market crash of January 2018 and the volatility that followed However, the process is not as straightforward as adding or removing Dai from circulation. Instead, the system uses a number of risk parameters to maintain the peg – one of which, the Stability Fee, is used to organically manage the supply of Dai." Tokens * There is the MKR coin, and the dai token. MKR is used for governance, dai is used to keep the peg to SDR (the IMF‘s Special Drawing Rights) Maker (MKR) * MKR is distributed in batches via crowd sales on the Maker forums. Can be bought through DEX's. * From this blog (31-1-2020): "There are currently over 17k MKR token holders.* The top 3 largest holders collectively own 38% of the total supply (with just the top 6 holding over 50%). These top 3 addresses are: 1) MakerDAO’s governance contract (202k MKR), 2) MakerDAO’s Multi Sig wallet (117k), and 3) Andreessen Horowitz’s wallet 60k (purchased ~6% of the MKR supply in September last year at a 25% discount)." * MKR is explained in depth here. As explained there: "The MKR token holders function as the governors of the Maker system. They decide on the specific collateral assets for the system, set the amount of Dai that can be borrowed against that collateral, determine the collateralization ratios of these assets, and ultimately charge an interest rate called the “stability fee.” The stability fee exists because the MKR holders, in addition to their governance responsibilities, are effectively the underwriters of every loan and the collateral buyer of last resort. In the steady state of the system, when loans are being paid back and not being liquidated, the MKR holders collect the stability fee through supply contraction (Dai collected as an interest rate is auctioned off for MKR and then burned). Even after liquidating a loan due to not meeting the collateralization ratio, there is usually excess collateral in the CDP to provide a cushion for the 1–1 peg. However, if the price movement in an asset is sharp enough to cause a shortfall in collateral relative to the amount of Dai borrowed against it, the MKR token supply is diluted and sold onto the open market to purchase Dai and offset this imbalance. In turn, it encourages the MKR holders to govern the system well and charge an appropriate interest rate for the loans they are insuring. If the Maker governors issue bad debt, it is the Maker governors who pay. Yes, if all value in the MKR token is also wiped out, then Dai holders would ultimately suffer, but there is no situation where MKR holders are bailed out at the expense of Dai holders." * From Token Tuesdays (20-8-2019): "In December 2017, Maker sold $12 million MKR in a private round to a group of investors led by Andreessen Horowitz and Polychain capital in addition to receiving investments from Distributed Capital Partners, 1Confirmation, FBG Capital, Placeholder VC, Wyre Capital and others. A year later, in December 2018, Maker announced that Andreesen Horowitz had purchased an additional $15M in MKR. Even with the limited investors in the private sale, MKR still bolsters nearly 14,000 addresses holding the token. However, according to Etherscan, the top 100 holders control 89.71% of the supply including exchange wallets. '' ''By subtracting the Maker Foundation’s ~250,000 MKR, the distribution shifts to the top 100 addresses controlling around 64% of the supply." Dai (DAI) * Dai is the Maker stablecoin built on the Ethereum blockchain. Launched 27-12-2017. * Started with Single Collateral DAI (now called SAI) and moved to Multi Collateral DAI in 2019. * From EthHub #86 (4-11-2019): "Say goodbye to the term ‘Collateralized Debt Position’ or CDP in multi-collateral Dai - they’ll instead be called ‘Vaults’." * From EthHub #87 (4-11-2019): "It finally happened - 100 million Dai were minted using the MakerDAO system - hitting the “debt ceiling” that has been in place for several months. Due to this, MKR token holders voted to increase the ceiling to 120 million and lower the stability fee to 5%." * MakerDAO’s stablecoin, Dai, has entered Beta testing on Wanchain (is live by now). This integration makes Dai the first ever cross-chain ERC20 token. The Dai token will utilize Wanchain’s cross-chain functionality allowing for Bitcoin to be exchanged for Dai in a fully decentralized manner and to potentially add Bitcoin to its collateralized debt position in addition to Ether. How is it done? * From Token Tuesdays (20-8-2019): "The process for generating Dai is pretty straight forward. After following a few simple steps and agreeing to the various parameters described below, Dai is autonomously minted and sent to your wallet through a smart contract without having any interaction with a third party. In particular, some of the parameters defined in a contract’s creation include: * Liquidation Price:'' The price at which your loan will be forced to liquidate, or “margin called”.'' * Liquidation Penalty: ''The mandatory fee that is paid if you are liquidated. Penalties are charged as a portion of existing collateral and are dynamically adjusted based on Maker governance decisions.'' * Collateralization Ratio:'' An indicator to see how leveraged your wallet is. It is recommended to maintain a ratio at least 50% above your forced liquidation to account for unexpected price swings.'' * Minimum Ratio: ''The ratio at which you will be force-liquidated, should your collateralization ratio fall below this ratio.'' * Stability Fee:'' A fee that needs to be paid in parallel with the DAI you borrowed to close your loan. As of writing, all stability fees must be paid in Maker’s native token (MKR) or Dai (DAI), with the expectation that these fees will be able to be paid in additional tokens in the future."'' Stability Fee * From this article (30-1-2020): "Dai is issued, not by a central party, but by anyone who wishes to borrow Dai from the system. To borrow (issue) Dai, a user must deposit collateral (Ether) in the system, allowing them to take out a loan of Dai against this collateral. The interest rate that is applied to this newly created Dai is called the Stability Fee. An increase in the Stability Fee would discourage users from borrowing Dai as it would be more expensive to do so. Those who had already borrowed from the system would also be more likely to pay back their loan, depositing the borrowed Dai into the contract and removing it from circulation. A decrease in the Stability Fee would have the opposite effect, encouraging users to deposit ETH and borrow (issue) Dai at a lower cost. One of the primary use-cases of borrowing Dai is to invest the borrowed Dai in Ether, leveraging their existing position in the expectation that the price of ETH will increase greater than the cost of borrowing (Stability Fee). Therefor the Stability Fee, which is voted on by MakerDAO, can be used to organically manipulate Dai supply and maintain the DAI-USD peg." * "Maker leverages a Stability Fee, better known as an interest rate that accrues on a Maker loan over time. This stability fee must be paid back when a user closes their loan, in which debt repayments are used to purchase and burn MKR. To date (13-11-2019), just under 5,000 MKR (or roughly $3M) has been burned through stability fees." Dai Savings Rate (DSR) * From this article (30-1-2020): "In November 2019 the MakerDAO system received a major upgrade. The upgrade introduced a number of new concepts including the Dai Savings Rate, an interest rate that is applied to all Dai deposited in a particular smart contract. This interest rate is paid from the funds generated by the Stability Fee and its rate is also decided by a MakerDAO vote. know how the Stability Fee can be used to manipulate the supply of Dai and maintain the DAI-USD peg. In a similar vein, the Dai Savings Rate can be used to manipulate the demand of Dai and maintain the DAI-USD peg. The Dai Savings Rate, then, provides MakerDAO governance with another string to their bow. Rather than maintaining the peg through supply-side economics alone, it is now possible to use the DSR to influence the demand for Dai. An increase in the Dai Savings Rate will increase the demand for buying Dai at an exchange, depositing the purchased Dai in the DSR contract and earning interest. A decrease in the Dai Savings Rate has the opposite effect, encouraging users to sell Dai to invest elsewhere. This has hopefully explained why the Dai Savings Rate exists and how it plays an important role in maintaining and fine-tuning the DAI-USD peg." Oasis (Interface for DSR) * From EthHub #88 (19-11-2019): "Maker has introduced an “all-in-one” DeFi hub ahead of it’s MCD launch which includes Oasis Trade (decentralized marketplace), Oasis Borrow (the new Vault portal for MCD) and Oasis Save (an interface for the Dai Savings Rate)." OasisDex * The market and trading platform derived from MakerDAO How is it used? * From Token Tuesdays (20-8-2019): "Users opening a CDP ''(Since 11-2019 called Vaults) ''through Maker generally do so to gain leverage. Users can collateralize ETH, generate Dai, and then purchase additional ETH with their newly minted Dai, resulting in the user having leveraged exposure to ETH. Since the debt is measured in Dai, if the price of ETH goes up, users can pay off their outstanding debt with less ETH, then hold onto the remaining ETH once the CDP is closed. Dai holders can utilize a special mechanic known as the Dai Savings Rate to earn a steady, low-risk return on their holdings in the upcoming Multi Collateral Dai implementation. A person who holds Dai can lock and unlock Dai into a DSR contract at any time. Once locked into the DSR contract, Dai continuously accrues, based on a global system variable called the DSR. There are no restrictions or fees for using DSR other than the gas required for locking and unlocking." * "The core smart contract at Maker is the CDP. Let’s use an analogy to describe these. Pretend you are at the bank asking for a home equity loan. You put up your house as collateral and they give you cash as a loan in return. If the value of your house decreases, they’re going to ask you to pay the loan back. If you can’t pay the loan back, they’re going to take your house. To bring this back to Maker, just replace your house with ether, the bank with a smart contract, and the loan with Dai. That’s all there is to it. You give the Maker CDP smart contract your ether and it lets you take out a loan in Dai. If the value of your ether goes below a certain threshold, you either have to pay back the smart contract as you would a bank or it will auction off your ether to the highest bidder. In summary, CDPs are simply where the collateral (ether) in the Maker system is held." Governance Three Part system * "There are three parts to Maker: the Makercoin holders that make up its government, the Keepers who “mine” margin calls and arbitrage opportunities, and the CDP '(Since 11-2019 called Vaults)'' engine. Each piece supports the other to create the Maker leverage platform and its stablecoin, dai:'' # Decentralized Governance model: “Maker has a governance token called Makercoin (MKR) which is used for voting on proposals. Voting is weighted based on MKR holdings. Reward comes from weekly buy-and-burns, in which Maker uses its profits to buy back MKR from MKR holders. Any bought-back MKR gets destroyed, lowering the overall supply of MKR and driving up the price for those still holding.” # Keeper: Right now Keeper is nothing more than a Docker image with a few programs that help keep the Collateralized Debt Position engine running. In particular, Keeper provides price feeds for Maker and performs margin calls on undercollateralized debt positions. We also plan on adding programs to help maintain other DAOs, such as the Ethereum Alarm Clock. Since Keepers are rewarded for these services, Keeper can be thought of as a sort of “meta-miner.” We eventually want to provide for sale a Raspberry Pi pre-loaded with the Keeper image to make the barrier to entry as low as possible, and to also help fund further Keeper development. # The Collateralized Debt Position Engine: The CDP engine helps dai maintain its peg with the IMF‘s Special Drawing Rights. It incentivizes untrusted, anonymous actors to drive the price of dai toward the price of SDRs. It also provides a platform by which those bullish on Maker-supported cryptocurrencies (such as ether or bitcoin) may take leveraged long positions on those currencies without having to trust an exchange. Collateralized Debt Positions on the Ethereum blockchain consist of some locked amount of cryptocurrency and some amount of issued dai. When one opens a CDP, the CDP issues one an amount of dai of lesser value than the cryptocurrency one locks up in the CDP. If one provides 150 dai worth of bitcoin for a CDP at 150% collateralization, for example, the CDP will create 100 dai for one out of thin air. One may then close out the CDP at any point in the future by paying in the amount of dai issued, which then returns to one the underlying collateral. To build on the previous example, 100 dai would release one’s bitcoin collateral. The 100 dai would then be destroyed. One caveat: there is a 2% APR associated with CDPs. If one wishes to close out a CDP which issued one 500 dai a year ago, for example, one must provide 510 dai. The 500 dai is destroyed as usual, while the extra 10 dai goes into Maker’s profit reserves. * In return for the significant value that the limited default insurance gives to the holders of DAI bonds, Makercoin holders earn a continuous insurance fee that is equal to 4% of all outstanding DAI bonds per year (The insurance rate varies over time depending on market conditions and user growth elasticity in order to maximize Makers income). This fee is transferred into the market cap of MKR through the use of a buy&burn contract that continuously buys up MKR from the market and burns it, reducing supply and increasing market price. This means that MKR will see a steadily decreasing supply and a steadily increasing market cap over time, except in situations where the Dai Credit System hasn't been properly governed and the debt ceiling for one or more risky collateral types has been set too high. * Makercoin holders are able to directly influence the governance of Maker and the Dai Credit System through a futarchy-like governance scheme. They are also able to indirectly influence the system by buying and selling based on how well they believe the risk parameters are set (i.e. a MKR holder who sees the debt ceiling of a risky asset type being raised to unsafe levels would want to dump their MKR as soon as possible to avoid the risk of forced inflation). * The result is that MKR is an extremely risky asset, but with a significant cash flow as long as its owners are able to competently set the debt ceilings of the Dai Credit System, and proactively vote or sell their MKR if the debt ceilings are mismanaged." * More on Maker Governance risk here Multi Collateral Dai * In single collateral Dai (now called SAI), the MKR token is primarily used for two things, stability fees and governance. In single collateral Dai, MKR holders determine the stability fee. In multi-collateral dai (MCD) or later just DAI, governing rights will expand into deciding which assets can be used as collateral in CDPs. A post-migration write-up can be read here (31-1-2020). * "Maker token holders have voted for which tokens will be prioritized in multi-collateral Dai; according to the votes the priority list will be Ethereum, Augur, Basic Attention Token, 0x, DigixDAO, OmiseGo, and Golem; between 39 and 50 unique voters participated in voting for each asset" * "Note (31-1-2020): even though the BAT vote was overwhelmingly in favor of adding the token (99.82%), it was not the first choice of the voters for the first new collateral on Maker. Augur’s REP token initially won the vote (figure 1.5), but Maker’s risk team assessment concluded that Augur’s impending v2 launch and the possibility of the REP token’s worth going to 0 was too risky to add it as collateral." * Over 70% of the Sai supply has been migrated to Dai so far (12-2019) Update: ~98% of the Sai supply has been migrated to Dai so far (12-1-2020) * From this blog post on Oracles V2 (3-9-2019): "The Maker Protocol uses Oracles to obtain the real-time price of assets. This price is used to determine whether a Vault has enough collateral locked up. '' ''In order to decentralize the MakerDAO Oracles further, the release of Oracles V2 introduces significant changes to MKR Governance. Governance will become much more active in end-to-end ownership and management of the Oracle infrastructure. To ease this transition, the Foundation plans to submit several new proposals to MKR holders (voters in the Maker community) on the public Governance Call on September 5. The proposals will then be published on the MakerDAO Forum on September 9, with a request for community feedback. Submission of the proposals to the Governance Portal for ratification is planned for September 16. The titles for these proposals are: * DeFi Partner Feeds (0x, dYdX, Set, Gnosis) * Oracle Team Mandate * Oracle Governance Framework * Oracles Incentive Restructuring Oracle Team Mandate (OTM) The Oracle Team Mandate is a proposal defining the responsibilities of a delegated party chosen by Maker voters to facilitate administration and technical development of the Oracles. The Maker Foundation will propose to governance that its internal Oracle team will occupy this position in an interim capacity until a suitable external Oracle team is elected. It is important to note that the Oracle Team does not have any special privileges to enact changes without voter approval; it is merely a facilitation mechanism for helping to craft proposals and guide the governance process. Oracle Governance Framework (OGF) The Oracle Governance Framework is a proposal that defines the rights and responsibilities of Maker governance with respect to Oracles. A blueprint that specifies the governance processes to administer the Oracles infrastructure, it is similar to how the Governance Risk Framework defines the rules for how Maker Governance functions. '' ''Some of the responsibilities of Maker Governors listed in the OGF are: * Defining criteria for selecting new Feeds * Defining criteria for selecting new Oracles * Adding and removing Feeds * Adding and removing Oracles * Identifying performance metrics for Feeds and Oracles * Selecting the Oracle price sensitivity parameters * Selecting the Oracle Security Module (OSM) delay parameter The full list of responsibilities and governance processes around Oracles will be included in the proposal and published on the MakerDAO Forum on September 9. Feeds are compensated for the valuable service they provide and, therefore, discourage malicious behavior. Currently, compensation is funded by the Maker Development Fund. In the future, payment is expected to be sourced from the stability fees generated by the Maker Protocol, representing a transfer of value from MKR token holders to Feeds." MKR Token Transfer * From their own blog (20-12-2019): "In the Maker Protocol, the MKR token plays two roles. First, as the governance token of the system, MKR allows those who hold it to vote on changes to the Protocol. One MKR token locked in a voting contract equals one vote. Second, through the automated Auction mechanisms of the system, the supply of MKR will fluctuate. During a Debt Auction, MKR is created by the Protocol and sold for Dai to cover outstanding debt, thereby increasing the total supply of MKR. By contrast, during a Surplus Auction, the Protocol sells surplus Dai for MKR, which the Protocol destroys, thereby decreasing the total supply of MKR. Given the importance of MKR to a healthy and functioning Maker Protocol, safeguarding the MKR token contract has historically been the responsibility of the Maker Foundation. The plan from day one has been to transfer MKR token control to Maker governance shortly after the launch of Multi-Collateral Dai (MCD). With MCD released and the Protocol functioning as expected, the transfer of authority has now been scheduled. Beginning on December 20, control of MKR token will be handed to the contracts, and therefore to the governance community, in steps as we continue on the path to decentralization. The Foundation will share control of the token with the contracts for about one month to ensure a successful handover. After that time, MKR token holders will be given full control, meaning that decentralized governance will be the only avenue for changing MKR token authorizations." Stability Fee Voting * Fee's have been increased up to 16.5%% in a series of voting rounds since the 1 dollar peg was not being maintained due to supply. It went up to 20% and then back down to 16.5% again in 9-2019. * “On October 28 ''(2019), Daniel Onggunhao, a software engineer at Binance, revealed that the dai stability fee was reduced to 5.5%. “A single whale (with 94.7% of voting power) made the decision — Went from 2,489 votes a few hours ago, to 44,539 votes,” One person disagreed with Onggunhao’s initial tweet and said that he didn’t think there was a “single ‘whale’ with 97% voting power.” “There could be a voter that represents 97% of this particular vote""'' * Update: as of 4-2-2020 the fee is 9%. How is the Dai Savings Rate decided? * From this article (30-1-2020): "The MakerDAO governance system and selection of the Dai Savings Rate is a multi-step process that begins with the Maker Foundation issuing a poll to MKR token holders. The poll is used to gather opinions on a number of risk parameters including the DSR. Once a poll has closed (after 2-3 days), it can be used to influence a subsequent “Executive Vote” that, once passed by MKR token holders, implements the changes voted on. Ultimately the DSR is determined by the system’s token holders and can be set within a range outlined by the Maker Foundation. This range is typically between 0.25% and 8.00% but is capable of going higher should the community deem it necessary." How Decentralized is it? * Was classified Degree 3 DeFi ''on the HackerNoon rankings of 25-4-2019. "''These DeFi products are non-custodial, have permissionless initiation of margin calls, and permissionless provision of margin call liquidity, while centrally administering price feeds, centrally controlling interest rates, and centrally controlling platform developments and updates." * A BIG side note, is that the blog was written by Kyle J Kistner who is Chief Vision Officer at bZx. He gave his own project the highest ranking. What a surprise. * From their comprehensive blog post: "Custody: MakerDAO smart contracts are open source and non-custodial from the point of loan origination. Initiating Margin Calls: Margin monitoring and margin call initiation is permissionless, incentivized, and decentralized. Margin Call Liquidity: Provision of liquidity is permissionless, decentralized, and incentivized. Price Feeds: MakerDAO price feeds are semi-centralized and imputed by a consortium of addresses voted on by MKR holders. Manipulation of the price feed by the consortium is mitigated by a sensitivity parameter that prevents updates from being moved outside a bounded range. The MakerDAO price feeds should be considered more decentralized than Compound’s price feeds. Interest Rates: Called “stability fees” in the MakerDAO ecosystem. Stability fees are interest paid by Vault holders. The stability fee is voted for by MKR holders. This is a semi-decentralized approach. It should be noted that currently, because of differences in interest rate determination, MakerDAO should be considered more decentralized than Compound, however the difference is nuanced. Development: MakerDAO contracts are centrally developed and open source. The contracts are not mutable. The release of MCD will require migration to a new contract." Emergency Shutdown * From their own blog (12-8-2019): "Emergency Shutdown is a process that can be used as a last resort to directly enforce the Target Price to holders of Dai and CDPs, and protect the Maker Protocol against attacks on its infrastructure. Emergency Shutdown stops and gracefully settles the Maker Protocol while ensuring that all users, both Dai holders and CDP holders, receive the net value of assets they are entitled to. Effectively, it allows Dai holders to directly redeem Dai for collateral after an Emergency Shutdown processing period. In Multi-Collateral Dai, the process of initiating Emergency Shutdown is decentralized and MKR holders (voters) can trigger it by depositing MKR in the Emergency Shutdown Module (ESM.) Emergency Shutdown is triggered when a quorum of the deposited MKR has been reached. The quorum is not meant to be a majority of the MKR in circulation, but it shall still be significant. MKR voters determine the quorum, which is initially proposed to be 50,000 MKR. " For a full explanation I highly suggest reading the full blog. For a summarisation: # "The process of initiating Emergency Shutdown is decentralized and controlled by MKR voters, who can trigger it by depositing MKR into the Emergency Shutdown Module. # Emergency Shutdown is triggered in the case of serious emergencies, such as long-term market irrationality, hacks, or security breaches. # Emergency Shutdown stops and gracefully settles the Maker Protocol while ensuring that all users, both Dai holders and CDP users, receive the net value of assets they are entitled to. # CDP owners can retrieve excess collateral from their CDPs immediately after initialization of Emergency Shutdown. They can do this via CDP frontends, such as the CDP Portal, that have Emergency Shutdown support implemented, as well as via command-line tools. # Dai holders can, after a waiting period determined by MKR voters, swap their Dai for a relative share of all types of collateral in the system. The Maker Foundation will initially offer a web page for this purpose. # Dai holders always receive the same relative amount of collateral from the system, whether they are among the first or last people to process their claims. # Dai holders may also sell their Dai to Keepers (if available) to avoid self-management of the different collateral types in the system." Internal Power Struggles * According to Cointelegraph (13-6-2019) Maker had quite some internal power struggles from the start of 2019, however Cointelegraph is known to be sensational, so read with caution: "It all started with the fact that Andy Milenius, the company’s chief technology officer, left the project, as reported by Cointelegraph on April 28. Internal conflicts have been aggravated by the recently found vulnerability and trials between the key members. Between April 22 and 26, a critical vulnerability was discovered and analyzed on the MakerDAO platform by the security audit firm Zeppelin. The vulnerability impacted the very functioning of MakerDAO by making user funds irretrievable. By exploiting the system’s vulnerable coding, attackers could gain access to the system and freely move the tokens staked in favor of one MakerDAO governance proposal to another — perhaps even a competing proposal — and lock them in place forever. On May 6, the MakerDAO team released an appeal to its community on Reddit: “In partnership with Coinbase and Zeppelin, the Maker Foundation has been participating in a second round of audits of the Maker Voting Contract. During this process, we discovered the need to make a critical update. ... You are advised to move your MKR out of the old contract and back into your personal wallet immediately.” What could have seemed as a routine error in code at the inception of MakerDAO turned out to be much more as the plot thickened with the sudden departure of Andy Milenius, the project’s CTO, in early April. His departure was preceded by a voluminous 24 page-long letter published on April 3, which begins with the words, “Currently, the Maker development team is going through its most difficult challenge that I have witnessed during my 3.5 years with the project.” In his letter Milenius outlined his long-standing conflict with MakerDAO CEO Rune Christensen and the former’s attempts to usurp the platform, which began back to January 2017: “He Christensen told me it was necessary that he have full unilateral control over the Dev Fund from that point forward.” As stated by Milenius, though later Rune abandoned this idea, the whole situation led to the creation of the opposition, aimed at preventing Rune from ruining the project and at protecting the community’s funds. Another event that affected the professional relations inside the company, according to Milenius, was the appearance of Matt Richards, who, in the spring of 2017, assumed the responsibility of the chief operating officer. According to Milenius, Richards was not only not familiar with the technical side of the project, but did not support the very idea of DappHub, the separate project led by the MakerDAO developers and initiated by Christensen to better manage the company’s processes. In addition, his invasion of the project interfered with the work of designers and developers, which soon led to internal conflicts and affected the platform’s development “I told him that Matt was consistently a distraction and wasted my time by proposing stupid ideas that needed constant rebuttal. I told him Matt’s opinion that the core developers were ‘my developers’ was preposterous and that I refused to control them and get them to ‘report’ to me like he wanted. I told him that Matt had done a lot of good for the project but that it was time for him to go.” However, even with Richards’s departure, the atmosphere inside the company did not improve. According to Milenius, Christensen was dissatisfied with the work of key developers — and they, in turn, tried to resist his attempts to monopolize the developers fund and spend all the money on his strategic initiatives. As the conflict inside the company smouldered further and involved new people, more and more people began to disagree with the way Christensen tried to take control of the decentralized autonomous organization (DAO), with the result that the main project developers from DappHub stopped cooperating. As stated by Milenius, his ideas of equal working space and democratization inherent in DAO, and the desire of his fellow executives to traditional corporate efficiency hadn’t been accepted by Christensen. Later, Milenius confirmed to the media that he is no longer the technical director of MakerDAO. When the company’s infrastructure expanded and disagreements began to arise, Christensen offered the developers two options for cooperation: the Red Pill and the Blue Pill. Those who chose Red Pill were supposed to work for him inside the Maker Ecosystem Growth Group (MEGG) on the initiatives that “he was going to eventually document in the much-promised Strategic Plan.” The tasks were aimed at delivering government compliance and integrating Maker into the existing global financial system. The Blue Pill was prepared for those who didn’t want to work on those initiatives. Their primary duty was the implementation of Multi-Collateral DAI (MCD) core contracts needed to launch a fully autonomous system, after which their relationships with the company would cease. According to Milenius, nobody accepted those binary options since they conflicted with the main idea of the decentralized company. General discontent led to the creation of an opposition group that called itself the Purple Pill in March 2018. Members include former MakerDAO business development executive Ashleigh Schap, who proclaimed that they aimed to make the company more decentralized. Schap, who has allegedly created the group, is now suing MakerDAO in a $1 million lawsuit. As the Purple Pill group was growing, tension was also rising on the Foundation Board. Christensen requested a large amount of MKR tokens from the Foundation Board for allegedly funding and expanding operations. When the members asked for more transparency and requested documents that could confirm his demands, he was surprised. This event could also become the reason why he later accused board members of conspiracy, when he found out there was a Signal group. As a result, some board members who participated in the Purple Pill group were fired. MakerDAO has seen its fair share of woes, and they were only aggravated when five of the nine board members requested the Campbells law firm for assistance after they had been forced by Christensen to leave the company. The letter also refers to the Purple Pill affair. All five claim that the discussions were neither conspiratorial nor clandestine, and involved a large group of people engaged in the project in various capacities, exploring ideas with a shared goal of protecting and advancing the project. On April 27, Richards published an answer to Milenius’s accusations in a Reddit thread — thus, providing a chance to address the story from a different angle. Richards also referred to Milenius as the person who was mainly interested in technical nuances and coding, rather than in the project’s development. The biggest risk thus far is the vulnerability found in the system, since it could be only a matter of time before someone, somewhere tries to take advantage of it. The company has already announced that it has developed a fix together with Zeppelin and the implementation of it was underway." Audits * Has, as of 4-2-2020, done 5 audits (three by Trail of Bits, one by White Hat Group and one by Bok Consulting). Con's * From Token Tuesdays (12-2-2020): "Some of the biggest critiques of the Maker system are its centralized points of failure with governance, the price oracle, and introducing collateralization with non-trustless assets through Multi-Collateral Dai. With that said, governance is one of the bigger issues right now. As outlined in this article, it is entirely possible for wealthy, but malicious actors to collapse the Maker system by stealing all of the Ether locked in the system through a governance loophole. The malicious attackers could also steal all of the liquidity within ETH/DAI pairs (like on Uniswap) by printing quadrillions in Dai and purchasing the entire liquid supply in a single transaction. One of the other major critique includes the introduction of non-trustless assets in Multi-Collateral Dai. Non-trustless assets create potential counterparty risks for off-chain assets like real estate or equities as well as the ability to collateralize with relatively illiquid and centralized utility tokens (like BAT). " * From this article (30-1-2020): # "Smart Contract Risk – while the Ethereum platform is extremely secure, the applications built atop its blockchain might not be. Despite MakerDAO having undergone a number of smart contract audits, exploits and loopholes can potentially break the system with little recourse. The Maker Foundation have somewhat mitigated this with their “Emergency Shutdown” feature in the event of catastrophe. # Governance Risk – the governance mechanism behind MakerDAO has previously been flagged as a possible security hole. While that particular hole was sealed, the plutocracy that governs MakerDAO (more tokens equals more power) could lead to a possible hijacking of the system. Given the current lack of liquidity and the centralization of coins among a number of heavily-invested entities, it is unlikely that such an attack could take place or be effective. # Regulatory Risk – the risk of regulators upending the system is vague and hard to quantify. Dai is a representation of US Dollars on the blockchain but without any oversight from US regulators. This is arguably one of Dai’s strongest features, providing fair access for all to the world’s most widely-accepted currency, however it is likely to frustrate the powers that be in US government. # Platform Risk – Ethereum, at this point, has proven itself to be an unbreakable world computer. That said, there are a number of software upgrades on the horizon that could introduce new risks not yet accounted for." * From Token Tuesdays (20-8-2019): "Furthermore, governance participation has generally ranged from 2-5% of the total supply averaging less than 50 unique votes per decision, a common occurrence for blockchain ecosystems at large. While Maker’s governance system may be more active than most other projects, this limited range of engagement shows that only a minor percentage MKR holders are using the token for one of it’s core use-cases." Update from Token Tuesdays (13-11-2019): "Generally seen less than 10% of the supply participate in governance decisions with an average of less than 100 individual voters." '' Which is, still, a 100% increase in 3 months. * In one vote a 'whale' made the final decision by having 94.7 voting power. * Some claim it is not scalable. * Had quite some internal struggles * From Token Tuesdays (13-11-2019): ''"It remains quite clear that the community is still divided over whether or not introducing trusted assets defies the project’s decentralized nature. As such, there remains a chance that Maker’s governance schema may stagnate future growth in the event that the broader community decides to not allow for real-world assets to be included as future collateral." And also: "Finally, we noted above that MCD will cause SF’s to be used to fund a wider number of operations in the system. For MKR holders, this is definitely somewhat discouraging as the token value would be likely to be influenced more heavily by the entirety of SFs used to burn MKR as it’s currently designed. With this being said, there’s no denying that using SFs to fund the Dai Savings Rate (DSR) and oracles is a logical and intuitive decision." Criticism * From this post by Preston Byrne: "It is my belief, and the belief of every professional person I know and respect, that MakerDAO is a shitcoin and Dai is a trash fire. The language scheme promoters use to describe it is confusing (e.g. “stability fee” instead of “withdrawal penalty”), the promises they make are overblown, the representations they have made for the scheme have changed multiple times over the past 20-odd months to match the observed behavior of the scheme, and the behavior of the USD peg was and remains highly unnatural, with little evidence of an organic market and considerable evidence of artificial trading activity. The second-layer solutions being built on top of it are amateurish, even reckless, and the investors funding these solutions and companies seeking to rely on them are as foolish as anyone who believes that repackaged Ether is safer than AAA-rated debt. Which is what these people actually believe. In my 35 years of life the practice of market making has not escaped my notice. I do not take issue with market makers or market making. I take issue with the fact, as I explained on the podcast, that in January 2018, on Dai’s largest market, with daily volumes of $2.6 million, the loss of one bot eliminated all but $300 of volume, being 99.9998846% of the volume on that market. I especially take issue with the fact that Rune Christensen explained this away as “a bot going down” and gullible and inexperienced young grasshoppers such as Leibowitz accepted the explanation on faith without bothering to actually do any follow up. 20 months later, I’m still waiting for someone, anyone, to do the follow up." Possible Treasury Attack * Micah Zoltu published a blog post (9-12-2019) describing an attack on MakerDAO that, he argued, could empty all the ETH from the system. From CoinDesk: "The problem, Zoltu writes, is in how Maker is governed: “Some group of plutocrats can control how the system behaves.” The attack would only be feasible for a few MKR whales if they wanted to act quickly. Zoltu said that 40,000 MKR would be enough if the attack had some sophistication. As of this writing, 48,400 MKR, based on the staking approach of the Maker voting system, could do it right away. The best thing MKR holders who care about securing the protocol can do, according to Kampmann, is stake their MKR on votes. The more that's staked, the more expensive this attack will be, and there is a lot of MKR on the sidelines right now." a16z as of time of writing did have enough coins to do such an attack. UPDATE: The Maker Foundation has introduced a new security proposal (9-12-2019) to set a 24-hour governance delay on new executive contracts. MetaCoin and Centralized points of failure * From this announcement (10-2-2020) of launching "MetaCoin—The Governance-Minimized Decentralized Stablecoin", which would become a competitor of Maker: "The complexity MakerDAO also hides centralized points of failure, some of which are exceptionally severe and can result in a catastrophic and instant loss of all ETH in the system. Case in point, MakerDAO currently has at least four custodians , each of whom can, at will, steal 100% of the ETH collateral deposited in MakerDAO, also print a gajillion DAI, and then use that DAI to steal 100% of the ETH liquidity offered for the ETH/DAI pair across all decentralized exchanges (e.g. Uniswap) and lending protocols (e.g. Compound). The custodians, the Maker Foundation, a16z, PolyChain, and Dragonfly, could execute this entire heist in a single atomic Ethereum transaction, before anyone has a chance to respond." DSR doesn't have negative interest rates * From this blog's comment section (10-2-2020): "One of the major oversights of the DSR is the fact that the interest rate (as far as I know) cannot be negative. Although a negative interest rate might seem counter - intuitive it actually is quite reasonable in this system, since the collateral is quite volatile and is prone to large and swift price drops. In the situation of a large expected price decrease, the stablecoin (DAI/COIN) can see heavy buying pressure (as a safe asset) at the same time that CDP holders/ depositors what to burn the stablecoin and cover their longs to prevent loses. In this situation, the market clearing interest rate to hold COIN at $1 (and not break upward) might be significantly negative to cover the expected losses of ETH holders in the system (eg. COIN holders paying for the safety of the stablecoin). The post doesn’t mention if interest rates can be negative, but I think it’s important to keep this scenario in mind and not assume the interest rate must be positive in all cases." Usage On-Chain Analysis * From Into The Block (26-11-2019): "Over Half of MKR Holders Are Making Money ''IntoTheBlock’s machine learning algorithm identifies the average cost at which each address purchased a token. The In/Out of The Money chart compares current price of a cryptoasset to the average purchasing costs to determine what percentage of holders are making money, breaking even and losing money on their positions. As can be seen above, 71.3% of holders are either breaking even or making money on their positions, at least on paper.'' This is particularly impressive taking into account that Maker launched in November 2017 right before the peak of the 2017 bubble and 2018 bust. In contrast, other ERC-20 tokens had very different outcomes for holders, with tokens like ZRX and OmiseGo (OMG) having only 24.5% and 1.1% in the money, respectively. MKR is Heavily Concentrated Amongst Whales '' ''Whales, which IntoTheBlock defines as addresses that hold more than 1% of the circulating supply, account for roughly two thirds of MKR tokens. Addresses considered as investors, which also represent a significant 21.8%, are those that hold between 0.1% and 1% of the circulating supply. Out of a total of 8 whales holding 66.5% of the total circulating supply, we can identify the Maker Foundation and a16z crypto as key stakeholders in the MKR decision-making process. This is not necessarily a negative sign, but could be seen as something going against the industry’s ethos of decentralization. Growing Stability for DAI '' ''As inferred by the name, it is essential for a stablecoin to maintain, well, stable relative to the asset they are pegged to. DAI, which had an all-time high price of $4.77 in February 2018, has improved remarkably on this end. As can be seen in the graph below, DAI’s peg to the dollar has become more robust. DAI has a large amount of active and new users '' A proxy to adoption of a cryptocurrency is the number of addresses utilizing the asset on a given day. In the case of Maker’s stablecoin DAI, the number of active addresses has increased from around 700 a day at the beginning of the year to over 3,000 recently.'' What stands out is the percentage of addresses that are new to DAI on a daily basis — 34% of addresses using DAI in the last 24 hours are new addresses, those that were just recently created. This could be seen as a sign of growing interest and attraction of new participants. In comparison, only 17% of addresses using ETH in the last 24 hours are new users. Overall, the on-chain indicators covered through IntoTheBlock data provide a healthy outlook on the Maker ecosystem." Team, investors, partners, etc. Team * Has a big team * Rune Christensen; CEO, founder, de facto legal responsibility for the project * Andy Milenius; old CTO, left 28-4-2019 * Steven Becker; President & COO * Matt Richards; old COO * Wouter Kampmann; Head of Engineering * Ethan Bennett; Developer * 'Coulter' * Primož Kordež; Part of MakerDAO Interim Risk Team * Qijun; Advisor - China * Casey, Ryan; one of the creators, worked on Maker together with Nexus * Martin Lundfall; Formal Verification Researcher @ Ethereum Foundation & DappHub * The Dai Foundation, as it will be called, is going to be located in the small Swiss town of Zug. Update: (31-12-2019): "The Dai Foundation is based in Denmark and is independent of the Maker Foundation. Currently, its application to operate as a non-profit entity is under Danish government review." Investors * Is being backed and advised by Polychain Capital * The newly created, a16z crypto, dedicated crypto fund by Andreessen Horowitz has purchased 6% of the total MKR token supply for $15 million USD. "The strategic purchase in MakerDAO is one of the first from a16z crypto, the newly created, dedicated crypto fund from Andreessen Horowitz. The move was driven by General Partner Katie Haun, an accomplished former federal prosecutor who led the first government task force on cryptocurrencies and also led the investigation into the Mt. Gox hacks and into the federal task force investigating Silk Road. “As a first mover and innovator in stablecoins, MakerDAO represents a very compelling opportunity in the crypto space,” said Katie Haun, “MakerDAO’s technology, ecosystem and talent have put theory into action to deliver a decentralized stablecoin that we believe will help drive the future of the crypto economy.” As part of this partnership, MakerDAO will receive operating capital through the next growth stage, 3 years of support for the MakerDAO community, and most importantly, full operational support from the 80+ person Andreessen Horowitz a16z team. Specifically, Dai Stablecoin adoption and regulatory support are two of the first priorities. * From this CoinDesk article (19-12-2019): "Venture funds Dragonfly Capital and Paradigm have acquired $27.5 million worth of MKR tokens and plan to take part in the Maker Protocol's governance system. Announced Thursday by the Maker Foundation, the $27.5 million raised will fund the foundation's efforts to promote dai adoption in China and the broader Asia region. It's expected Dragonfly and Paradigm, who already have a strong presence in the region, will advise on the expansion.The joint purchase means Dragonfly and Paradigm now control approximately 5.5 percent of the total MKR token supply. Combined, the acquisition makes Dragonfly and Paradigm the second-largest private holder of MKR tokens. VC firm Andreessen Horowitz remains the single largest private holder with the 6 percent stake it acquired in September 2018." * "The Stable Fund is an investment fund started by L4, in partnership with MakerDAO. We help startups using the Dai Stablecoin System with business development, financing, and strategic introductions. Our team and immediate network is comprised of Ethereum founders and early backers and founders of billion dollar companies. When Stable Fund startups get funding, they're joining that network." * From Token Tuesdays (20-8-2019): "''In December 2017, Maker sold $12 million MKR in a private round to a group of investors led by Andreessen Horowitz and Polychain capital in addition to receiving investments from Distributed Capital Partners, 1Confirmation, FBG Capital, Placeholder VC, Wyre Capital and others. A year later, in December 2018, Maker announced that Andreesen Horowitz had purchased an additional $15M in MKR. Even with the limited investors in the private sale, MKR still bolsters nearly 14,000 addresses holding the token. However, according to Etherscan, the top 100 holders control 89.71% of the supply including exchange wallets. '' Partners * Has a partnership with MARKET Protocol (still as of 8-2019) * Has a partnership with Digi Global (still as of 8-2019) * Part of the WBTC community (still as of 8-2019) * Is a founding member of the ECF * Using the 0x protocol * Works together with Loom Network (19-9-2019) * Partners with Wyre (As of 28-10-2019 on the website of Wyre) Category:Companies/Organisations Category:Lending